Chapter 17 QUIZ—Earnings Per Share and Retained Earnings
MULTIPLE CHOICE
QUESTION # 1
1. Which one of the following indicators is intended to show the potential impacts of possible future
events on a corporation's performance?
a. basic earnings per share
b. cash flow per share
c. diluted earnings per share
d. price/earnings ratio
QUESTION # 2
6. Basic earnings per share is computed as
a. Net Income / Total Number of Common Shares Outstanding
b. (Net Income  Preferred Dividends) / Total Number of Common Shares Outstanding
c. (Net Income  Preferred Dividends) / Weighted-Average Number of Common Shares
Outstanding
d. Net Income / Weighted-Average Number of Common Shares Outstanding
QUESTION # 3
8. Which of the following items would not be included in a basic earnings per share calculation?
a. undeclared dividends on noncumulative preferred stock
b. declared dividends on noncumulative preferred stock
c. undeclared dividends on cumulative preferred stock
d. declared dividends on cumulative preferred stock
QUESTION # 4
9. On January 1, 2010, Walters Corporation had 24,000 shares of common stock outstanding. On April 1,
it reacquired 2,400 shares; on July 1, it issued 10,800 shares; on October 1, it issued another 9,600
shares; and on December 1, it reacquired 600 shares. The weighted average number of common shares
outstanding for 2010 was
a. 26,950
b. 28,900
c. 29,950
d. 41,400
QUESTION # 5
10. On January 1, 2010, Brennen Corporation had 20,000 shares of common shares outstanding. During
the year, it sold another 2,600 shares on July 1 and reacquired 600 shares on November 1. The
corporation earned $337,600 net income. The company also has 15,000 shares of $10 par value, 6%,
cumulative preferred stock on which no dividends have been declared for the last two years. The basic
earnings per share for the year is
a. $15.92
b. $15.65
c. $15.50
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d. $15.08
QUESTION # 6
12. On January 1, a corporation had 10,380 shares of common stock outstanding. On August 1, it sold an
additional 6,000 shares. During the year, dividends of $4,800 and $56,000 were declared and paid on
the common and preferred stock, respectively. Net income for the year was $240,000. The basic
earnings per share for the year was
a. $10.56
b. $11.23
c. $14.29
d. $18.63
QUESTION # 7
13. On January 1, 2010, a corporation had 10,380 shares of common stock outstanding, and on June 1, it
reacquired 6,000 shares. Despite a net loss for the year of $180,000, the company declared and paid
cash dividends of $24,000 and $28,000 on common and preferred stock, respectively. The earnings per
share for 2010 was
a. ($33.72)
b. ($30.24)
c. ($22.10)
d. ($18.60)
QUESTION # 8
15. On January 1, 2010, Smith Company had 21,000 shares of common stock outstanding and issued an
additional 4,500 shares on May 1. The company declared and paid a cash dividend of $30,000 and
earned $330,000 net income. The earnings per share for the year was
a. $15.00
b. $13.75
c. $12.94
d. $12.50
QUESTION # 9
16. Common shares outstanding are increased as a result of a stock dividend or stock split. For purposes of
calculating the earnings per share, when is the stock dividend or stock split considered to have
occurred?
a. at the beginning of the earliest comparative period for which earnings per share
information is presented
b. at the end of the earliest comparative period for which earnings per share information is
presented
c. at the beginning of the year declared
d. as of the date of declaration
QUESTION # 10
17. On January 1, a corporation had 20,000 shares of common stock outstanding. An additional 4,000
shares were issued on July 1, and on November 1, the company declared a 3-for-1 stock split. The
denominator in the earnings per share calculation would be
a. 36,000
b. 56,000
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c. 66,000
d. 72,000
QUESTION # 11
18. On January 1, a corporation had 60,000 shares of common stock outstanding. On March 1, the
company reacquired 12,000 shares, and it declared a 10% stock dividend on October 1. The
denominator in the earnings per share calculation would be
a. 44,200
b. 40,800
c. 55,000
d. 60,000
QUESTION # 12
22. Reporting diluted earnings per share is required for which type of corporate capital structure?
a. simple
b. complex
c. diluted
d. primary
QUESTION # 13
25. The potential dilutive effect of the exercise of stock options or warrants will affect which of the
following when calculating diluted earnings per share?
a. the earnings per share numerator
b. the earnings per share denominator
c. both the numerator and the denominator
d. neither the numerator nor the denominator
QUESTION # 14
27. Dual presentation of the basic and diluted earnings per share amounts is
a. required for corporations with simple capital structures
b. optional for corporations with simple capital structures
c. optional for corporations of any structure
d. required for corporations with complex capital structures
QUESTION # 15
29. Smock Corporation had 30,000 shares of common stock outstanding during the year. In addition, there
were compensatory stock options to purchase 3,000 shares of common stock at $20 a share
outstanding the entire year. The average market price for the common stock during the year was $36 a
share. The unrecognized compensation cost (net of tax) relating to these options was $4 a share. The
denominator to compute the diluted earnings per share is
a. 31,000
b. 31,333
c. 31,667
d. 33,000
QUESTION # 16
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30. Under the treasury stock method, the number of shares of common stock assumed to be reacquired is
determined by using the
a. ending market price of the stock
b. average market price of the stock
c. beginning market price of the stock
d. par value of the stock
QUESTION # 17
31. The assumed conversion of convertible debt and preferred stock in diluted earnings per share
calculations affects
a. the numerator only
b. the denominator only
c. both the numerator and denominator
d. neither the numerator nor the denominator
QUESTION # 18
34. In the determination of the diluted earnings per share, convertible securities are
a. included if they are dilutive
b. included whether they are dilutive or not
c. included if they are antidilutive
d. not included
QUESTION # 19
35. Interest expense on convertible bonds that are dilutive is included in the numerator of the diluted
earnings per share calculation at an amount equal to
a. interest expense
b. interest payable
c. interest expense times the tax rate
d. interest expense times one minus the tax rate
QUESTION # 20
36. The term deficit in financial accounting means
a. net loss
b. a negative retained earnings balance
c. a negative cash balance
d. a negative stockholders' equity total
QUESTION # 21
37. How will a company's working capital and net income be affected by the recording of a cash dividend
on the declaration date? (Assume the dividend is paid on a later date.)
I.
II.
III.
IV.
Working Capital
decrease
decrease
no effect
no effect
Net Income
decrease
no effect
no effect
decrease
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a.
b.
c.
d.
I
II
III
IV
QUESTION # 22
45. The Carol Company has issued 10%, fully participating, cumulative preferred stock with a total par
value of $600,000 and common stock with a total par value of $900,000. No dividends are in arrears.
How much cash will be paid to the preferred stockholders and the common stockholders, respectively,
if cash dividends of $141,000 are distributed?
a. $ 60,000 and $90,000
b. $114,000 and $27,000
c. $ 51,000 and $90,000
d. $ 60,000 and $81,000
QUESTION # 23
46. The Farmer Company has issued 10%, fully participating, cumulative preferred stock with a total par
value of $300,000 and common stock with a total par value of $900,000. Dividends for one previous
year are in arrears. How much cash will be paid to the preferred stockholders and the common
stockholders, respectively, if cash dividends of $222,000 are distributed at the end of the current year?
a. $85,500 and $136,500
b. $78,000 and $144,000
c. $60,000 and $162,000
d. $55,500 and $166,500
QUESTION # 24
49. On November 1, 2010, the Metal Construction Company declared a property dividend payable in the
form of bonds held for long-term investment purposes. The bonds will be distributed to the common
stockholders on December 15, 2010. The bonds to be distributed to the common stockholders
originally cost Metal $210,000. Fair value of the bonds on various dates is as follows:
December 31, 2009
November 1, 2010
December 15, 2010
$220,000
225,000
230,000
Which one of the following amounts should be used to record the appropriate credit to Property
Dividends Payable?
a. $210,000
b. $220,000
c. $225,000
d. $230,000
QUESTION # 25
51. How will a company's total current liabilities and total stockholders' equity be affected by the
declaration of a stock dividend? (Assume the stock dividend is distributed at a later date.)
Total
Current Liabilities
Total
Stockholders' Equity
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I.
II.
III.
IV.
a.
b.
c.
d.
increase
increase
no effect
no effect
decrease
no effect
decrease
no effect
I
II
III
IV
Exhibit 17-1
The Zoeller Corporation's stockholders' equity accounts have the following balances as of December
31, 2010:
Common stock, $10 par (30,000 shares issued
and outstanding)
Additional paid-in capital
Retained earnings
Total stockholders' equity
$ 300,000
2,000,000
5,700,000
$8,000,000
QUESTION # 26
52. Refer to Exhibit 17-1. On January 2, 2011, the board of directors of Zoeller declared a 30% stock
dividend to be distributed on January 31, 2011. The market price per share of Zoeller's common stock
was $30 on January 2 and $32 on January 31. As a result of this stock dividend, the retained earnings
account should be decreased by
a. $ 90,000
b. $270,000
c. $288,000
d. zero; only a memorandum entry is required
QUESTION # 27
54. The Martin Company's stockholders' equity accounts have the following balances as of December 31,
2010:
Common stock, $20 par (25,000 shares issued of which
2,000 are being held as treasury stock)
Additional paid-in capital
Retained earnings
Less: Treasury stock (2,000 shares at cost)
Total stockholders' equity
$ 500,000
750,000
2,250,000
$3,500,000
(120,000)
$3,380,000
On January 2, 2011, the board of directors of Martin declared a 10% stock dividend to be distributed
on February 15, 2011. The market price of Martin Company's common stock was $65 per share on
January 2, 2011. On the date of declaration, the retained earnings account should be decreased by
a. zero; only a memorandum entry is required
b. $ 50,000
c. $149,500
d. $162,500
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QUESTION # 28
55. A dividend that represents a return of capital rather than a distribution of retained earnings is called a
a. property dividend
b. stock dividend
c. capital dividend
d. liquidating dividend
QUESTION # 29
56. When a company is determining its dividend policy, the company must adhere to legal requirements.
The legal requirements are determined by the
a. Financial Accounting Standards Board (FASB)
b. state in which the company was incorporated
c. Securities and Exchange Commission (SEC)
d. Federal Trade Commission (FTC)
QUESTION # 30
57. If a company makes a prior period adjustment, which of the following describes how it must be
reported?
a. The adjustment is recorded in retained earnings, and previous years' financial statements
presented for comparative purposes are not changed.
b. The adjustment is recorded in retained earnings, and previous years' financial statements
presented for comparative purposes are adjusted.
c. The adjustment is reported in the current period's income statement as a separate item.
d. The adjustment is recorded as a deferred asset or deferred liability and amortized using the
straight-line method.
QUESTION # 31
60. Which of the following could be a component of other comprehensive income (loss)?
a. realized gains or losses from sale of investments in available-for-sale securities
b. translation adjustments from converting the financial statements of a company's foreign
operations into U.S. dollars
c. gains (losses) on extraordinary items
d. warranty liability adjustments
QUESTION # 32
61. How may a corporation report its types of comprehensive income?
a. It may report the amount of accumulated other comprehensive income for each item as
part of stockholders' equity.
b. It may report the total amount of accumulated other comprehensive income for all the
items as part of stockholders' equity.
c. It may make footnote disclosures of totals only.
d. It may report the amount of accumulated other comprehensive income for each item or in
total as part of stockholders' equity.
QUESTION # 33
63. The following information is provided for the Columbus Company:
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Deferred compensation payable-stock appreciation rights
Bonds payable
Additional paid-in capital on common stock
Donated capital
Treasury stock (at cost)
Common stock, $1 par
Common stock option warrants
Unrealized increase in value of available for sale securities
Additional paid-in capital from treasury stock
Retained earnings
$ 10
120
20
16
8
100
40
28
3
57
What is the total stockholders' equity of Columbus Company?
a. $212
b. $228
c. $256
d. $272
e. none of these
QUESTION # 34
65. When recording the receipt of donated assets, the credit could be to
a. Retained Earnings
b. Donated Capital
c. Gain on Donations
d. a contra account to the asset
QUESTION # 35
67. Which of the following stockholders' equity disclosures are required under both GAAP and IFRS?
a. capital not yet paid in
b. restrictions on the repayment of capital
c. dividend preferences
d. shares reserved for future issuances under sales contracts
QUESTION # 36
68. The two defined sections of stockholders' equity under IFRS are
a. contributed capital and other equity
b. share capital and retained earnings
c. contributed capital and retained earnings
d. share capital and other equity
QUESTION # 37
69. Differences exist between IFRS and GAAP in the reporting of EPS. Which of the following areas is
not an area of difference?
a. adjustment in options calculations for unrecognized compensation cost
b. treatment of unvested contingently issued shares
c. treatment of dividends in arrears for convertible preferred stock
d. treatment of contracts that may be settled in shares or for cash
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QUESTION # 38
70. Specific EPS disclosure is regularly reported for extraordinary items under
I.
II.
III.
IV.
a.
b.
c.
d.
IFRS
yes
no
yes
no
GAAP
no
yes
yes
no
I
II
III
IV
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